Is CITECH (KRX:004920) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies CITECH Co., Ltd. (KRX:004920) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CITECH

How Much Debt Does CITECH Carry?

As you can see below, at the end of September 2020, CITECH had ₩15.8b of debt, up from ₩5.55b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩3.54b, its net debt is less, at about ₩12.2b.

How Healthy Is CITECH's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CITECH had liabilities of ₩31.4b due within 12 months and liabilities of ₩9.53b due beyond that. Offsetting these obligations, it had cash of ₩3.54b as well as receivables valued at ₩5.83b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩31.6b.

When you consider that this deficiency exceeds the company's ₩22.0b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is CITECH's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CITECH wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to ₩46b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months CITECH produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩2.9b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩5.3b over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for CITECH you should be aware of, and 2 of them are a bit concerning.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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